Merz: Paragraph 9.1c of the AIR purchase-and-sale agreement, a standard document in the real estate industry, clearly states “Seller recommends that Buyer obtain a Hazardous Substance Conditions Report … and this report shall be paid for by Buyer.” So, per the purchase-and-sale agreement, this report, commonly known as a “Phase 1,” is the buyer's responsibility.

Over the years, we have listed and sold several properties, such as electronics-manufacturing sites, which were known to contain hazardous substances. Based on our experiences, we have broadened our view regarding where responsibility lies in uncovering environmental issues. Unless the seller is certain, which is unlikely, that no previous occupant of the property handled any hazardous materials, we recommend that the seller, at their expense, retain a professional to complete the Phase 1 report before listing the property to market. We say this is for a couple of reasons:

1. Most lenders require an environmental report as a condition to approve the loan. Therefore, sellers should hire a respected consultant who is an approved vendor for many of the major banks. Having the Phase 1 done ahead of time eliminates questions up front. It will cost around $2,500 to $3,000. Sometimes the consultant's report will recommend additional testing, which includes sampling of soil below the slab. Most likely, the results will not be adverse. If the buyer's lender still requires another report, the buyer can then pay for it, and the seller can at least be confident that the results will be similar.
2. Because the buyer will expect the seller to pick up the costs of any additional work recommended in Phase 1, the last thing a seller wants is a buyer's consultant on the property who may be motivated to create billable hours by “self-prescribing” extra tests and expanded work. Once this happens, the seller is “along for the ride” with no clear end in sight. The worst part is that this report now becomes a permanent record that must be disclosed to any future buyer. Conversely, if the seller completes the Phase 1 ahead of time (and any additional recommended work), he can avoid being blindsided by a negative report.

GlobeSt.com: Does it always make sense to complete the Phase 1 before bring the property to market?

Merz: In the sales of the electronics manufacturing buildings I previously mentioned, we suggested the seller complete a Phase 1 report and additional testing before we brought the property to market. We could then confidently eliminate concerns with potential buyers from the outset. In each case, we successfully sold the building for our client.

GlobeSt.com: How much should sellers rely on these reports in sales situation?

Merz: Sellers should always rely on the work of their consultants and refer back to these reports. Sellers should never make representations about these matters. By following these guidelines, we have always been able to get through the concerns and close escrow.

Merz: “Having the Phase 1 done ahead of time eliminates questions up front.”

SAN DIEGO—By acting proactively, building owners with environmental issues who are looking to sell their property are likely to resolve any concerns over potential hazardous waste and can avoid unnecessary time and expenses, Lee & Associates principal Peter Merz tells GlobeSt.com. We spoke with Merz about the steps to take when dealing with environmental situations.

GlobeSt.com: Why are environmental issues a concern for owners looking to sell?

Merz: Just the mention of hazardous waste can bring feelings of stress and angst to building owners. The concern normally arises when property owners decide to sell their property, but are unsure if previous uses of the site may have caused contamination. The uncertainty of the situation and how it will play out often causes stress to potential sellers. Fortunately, perception is usually worse than reality. By acting proactively, building owners are likely to resolve any concerns over potential hazardous waste and can avoid unnecessary time and expenses.

GlobeSt.com: How can sellers know what their responsibilities are with regard to these issues?

Merz: Paragraph 9.1c of the AIR purchase-and-sale agreement, a standard document in the real estate industry, clearly states “Seller recommends that Buyer obtain a Hazardous Substance Conditions Report … and this report shall be paid for by Buyer.” So, per the purchase-and-sale agreement, this report, commonly known as a “Phase 1,” is the buyer's responsibility.

Over the years, we have listed and sold several properties, such as electronics-manufacturing sites, which were known to contain hazardous substances. Based on our experiences, we have broadened our view regarding where responsibility lies in uncovering environmental issues. Unless the seller is certain, which is unlikely, that no previous occupant of the property handled any hazardous materials, we recommend that the seller, at their expense, retain a professional to complete the Phase 1 report before listing the property to market. We say this is for a couple of reasons:

1. Most lenders require an environmental report as a condition to approve the loan. Therefore, sellers should hire a respected consultant who is an approved vendor for many of the major banks. Having the Phase 1 done ahead of time eliminates questions up front. It will cost around $2,500 to $3,000. Sometimes the consultant's report will recommend additional testing, which includes sampling of soil below the slab. Most likely, the results will not be adverse. If the buyer's lender still requires another report, the buyer can then pay for it, and the seller can at least be confident that the results will be similar.
2. Because the buyer will expect the seller to pick up the costs of any additional work recommended in Phase 1, the last thing a seller wants is a buyer's consultant on the property who may be motivated to create billable hours by “self-prescribing” extra tests and expanded work. Once this happens, the seller is “along for the ride” with no clear end in sight. The worst part is that this report now becomes a permanent record that must be disclosed to any future buyer. Conversely, if the seller completes the Phase 1 ahead of time (and any additional recommended work), he can avoid being blindsided by a negative report.

GlobeSt.com: Does it always make sense to complete the Phase 1 before bring the property to market?

Merz: In the sales of the electronics manufacturing buildings I previously mentioned, we suggested the seller complete a Phase 1 report and additional testing before we brought the property to market. We could then confidently eliminate concerns with potential buyers from the outset. In each case, we successfully sold the building for our client.

GlobeSt.com: How much should sellers rely on these reports in sales situation?

Merz: Sellers should always rely on the work of their consultants and refer back to these reports. Sellers should never make representations about these matters. By following these guidelines, we have always been able to get through the concerns and close escrow.